Small-cap stocks are currently trading at their lowest valuation range in the past two decades, according to portfolio manager Steve Scruggs of the FPA Queens Road Small Cap Value Fund. While large-cap stocks tend to dominate financial media coverage, Scruggs points out that small-cap stocks, especially large-cap growth stocks, are relatively undervalued compared to their larger counterparts.
Scruggs, who has been managing the FPA Queens Road Small Cap Value Fund since its inception in 2002, emphasizes his “bias toward quality” when selecting stocks for the fund. He focuses on companies that exhibit strong balance sheet strength, attractive valuations, solid management teams, and promising sectors and industries.
One example of a stock held by the fund is ServisFirst Bancshares Inc., a regional bank with a branch-light business model that has consistently achieved low efficiency ratios. Another holding is Fabrinet, a contract manufacturer for optical communications equipment that has benefited from strong growth in its data-center business.
Graco Inc., a maker of fluid-handling equipment, is another long-time holding of the fund, while UGI Corp. is seen as a cheaper stock with potential for turnaround despite operational challenges.
As of December 31, the FPA Queens Road Small Cap Value Fund had about 9.5% of its assets in cash, reflecting Scruggs’s cautious approach to finding quality companies. The fund’s top holdings included companies like Fabrinet, TD Synnex Corp., and InterDigital Inc.
Overall, DailyBubble believes that small-cap stocks present an attractive investment opportunity due to their current undervaluation relative to large-cap stocks. Scruggs’s focus on quality and careful stock selection process align with DailyBubble’s perspective on prudent investing strategies in the small-cap space.